RBC sets new course on mortgage rates

A "For Sale" sign sits in front of a house in Toronto, in an April 20, 2010, file photo. October was another hot month for the Toronto area's residential real estate market, with the number of sales hitting a record high and prices soaring by double-digits. THE CANADIAN PRESS/Darren Calabrese

Under pricing pressure from spiking bond yields and Ottawa's housing market crackdown, Royal Bank of Canada is boosting its most important fixed-rate mortgages.

RBC is also introducing a new pricing structure, charging different rates for mortgages with amortization periods of 25 years or less and for those with longer maturities -- a first for Canada.

Starting November 17, a new RBC five-year mortgage with an amortization period of 25 years or less will cost 2.94 per cent, up from 2.64 per cent, an 11 per cent jump. The bank also increased its three-year and four-year rates for these mortgages to 2.69 per cent and 2.79 per cent, respectively.

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For mortgages with amortization periods longer than 25 years, the rates climb even more quickly. The annual cost of a five-year mortgage of this length will rise 40 basis points – a basis point is 1/100th of a percentage point – to 3.04 per cent.

The increases come as Canada's banks grapple with the federal government's crackdown on a frothy housing market. In October, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20 per cent, as well as restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.

The latter change is likely to have fostered the new rates for different amortization lengths. Mortgages that take more than 25 years to pay back no longer qualify for bulk mortgage insurance. Even if these longer-dated loans aren't very risky, banks like to buy insurance for them, because it absolves them of having to hold any capital against the loans. The regulator deems them risk-free this way.

Canada's banking watchdog, the Office of the Superintendent of Financial Institutions, has also imposed new rules that will require lenders to hold more capital against riskier mortgages. Combined with the other changes, financial institutions suddenly find it more expensive to lend against housing.

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As the banks wrestle with these rules, bond yields have also started spiking. Since Donald Trump was elected president of the United States last Tuesday, the five-year Government of Canada bond yield, which is used as a benchmark for mortgages, jumped 21 basis points to 0.96 per cent.

The sudden spike affects banks because their mortgages earn a spread off of the five-year benchmark rate. Whenever their borrowing costs rise, they pass the increase along to customers who take out new loans.

Because Ottawa is changing the rules, rate hikes were "to be expected," explained James Laird, co-founder of rate comparison site RateHub.ca. But spiking bond yields have added even more urgency. "That's the most fundamental reason to change mortgage rates," he added.

Ratehub calculates that for a $400,000 mortgage amortized over 25 years, RBC's new rate will increase monthly payments by $60.

Although that is a small amount, it could cool the housing market, and that would hit new loan formations for the banks. Yet these financial institutions are now likely earning better margins across their lending portfolios, which offsets any pain.

Net interest margins, or the difference between their total borrowing costs and their total lending revenues, have plummeted in this era of low rates. Rising bond yields should allow them to add a few extra basis points to the spread, resulting in better bottom lines.

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Rival banks have yet to respond to RBC's move, but some have already made small changes of their own. Earlier this month, TD raised its prime rate for variable-rate mortgages by 15 basis points, to 2.85 per cent from 2.7 per cent. BMO also adjusted its variable rate for new loans.

For anyone suddenly worried about more expensive mortgages, Mr. Laird offers some perspective. "I remember how big of a deal it was when fixed-rates breached the 3 per cent mark [in 2012]," he said. The latest move matters when comparing this week to last week. "But if you zoom out, we're still at an all-time low. Mortgages are still ridiculously cheap."

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